Determinants of tax capacity and tax effort in Southern Africa: An empirical analysis

Abstract

Literature posits that numerous economic and institutional factors limit the amount of taxes that a country can raise. Against this background, the substantive aim of this study was to assess the determinants of tax capacity and tax effort in the SADC. A multi-step procedure was followed to estimate determinants of tax capacity and tax effort using stochastic tax function and unbalanced panel data for 13 SADC countries1 . The study disentangled the error term to estimate the random effects separately from tax effort to capture the time-invariant country-specific effects. Further, tax effort was classified as persistent (long-run) and transient (short-run). The findings of the quantitative analysis indicate that financial deepening, economic development and trade openness influence tax capacity, while corruption and inflation influence tax effort. The SADC region has low persistent tax effort, implying that improving tax administration has superseded tax policy reforms. This result is augmented by the fact that tax legislation efforts were largely successful in tax administration but rather limited given tax policy. Tax policy designers should be informed by conditions of a country and policy considerations confirmed.